Peter Hadekel, Special to The Gazette   09.18.2012

A common investor mistake is reacting to short-term performance rather than looking at the longer-term outlook for a stock.

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What are the most common mistakes made by investors?

One is selling a good stock too early, instead of sticking with a proven winner.

Another is falling for the fad of the moment, whether it’s resources, high-technology or anything that’s tied to the economic cycle.

A third is reacting to short-term performance rather than looking at the longer-term outlook for a stock.

Guy Le Blanc, founder and chairman of the Cote 100 money management firm, has tried to avoid those pitfalls in building his investment business over the last 25 years.

Now his sons Philippe, president, and Sébastien, vice-president of business development, are pursuing the same philosophy as they manage more than $300 million in private client wealth from their offices in St-Bruno.

Inspired by value-investing legends Benjamin Graham and Warren Buffett, Guy Le Blanc began in 1988 by developing his own ratings system for stocks.

He started as a consultant to pension funds such as the Caisse de dépôt et placement, then launched his own family of mutual funds.

Now, the emphasis is on personalized wealth management for private clients with more than $300,000 in investable assets.

The Cote 100 name refers to the maximum number of points a stock can score in his rating system, based on 17 criteria designed to preserve capital and produce stable returns without too much volatility.

The broad categories are: the amount of debt on the books, the growth rate of sales and earnings, and the market valuation, or affordability, of the stock.

By screening stocks this way and sticking rigidly to the discipline, the Cote 100 core portfolio has outperformed the S&P/TSX index over 25 years, with an average annual total return of 10.7 per cent vs. 8.1 per cent for the index.

“When the market does badly, we tend to do much, much better,” Philippe Le Blanc said. “On the other hand, when growth really explodes in the stock market because of some short-term trend (such as a resource or technology bubble) we can look bad.”

A case in point, he says is the 1999-to-2000 period when investors fell in love with technology and dot-com stocks. “It was brutal for us, because we had stayed out of high-tech.”

Cote 100’s returns in those years were 1.7 and 5.8 per cent, while the S&P/TSX scored staggering gains of 28.1 and cent and 63.4 per cent.

But when the euphoria over tech stocks evaporated and the market crashed in 2001, dropping 33 per cent, Cote 100 posted a 5.8-per-cent gain.

And for the last 12 months ended Aug. 31, during times of increasing volatility when stocks declined 3.6 per cent, the Cote 100 portfolio gained 23 per cent.

“That’s not necessarily sustainable,” said Philippe Le Blanc, “but we were in the right stocks at the time. Going forward, it will be harder to earn the historical average.”

Even so, he remains optimistic that the firm’s stock-picking focus will continue to turn up bargains. “There is a very high level of pessimism right now. People have become disenchanted with the stock market.

“At times like this, there are very good opportunities to be found. A lot of good quality stocks can be bought quite cheaply.”

The Le Blanc teams looks for stable franchises where there is plenty of recurring cash and barriers to entry are high. The portfolio currently includes Quebec issues such as Alimentation Couche-Tard, Astral Media, Canadian National, Groupe CGI, Mediagrif Interactive, Saputo and Stella Jones.

U.S. holdings include Colgate Palmolive, Visa, US Bancorp and Walgreen.

With the outlook for economic growth likely to be flat for some years to come, Philippe Le Blanc anticipates that the pace of acquisitions will pick up. “Stocks are cheap and debt costs nothing.”

Companies with good balance sheets should continue to offer attractive dividend yields and continue to spend money buying back their stock and improving returns for investors.

At the firm’s founding in 1988, one year after a major market crash, “pessimists reigned supreme and the economic outlook was gloomy,” he recalled.

“Twenty five years later, not much has changed.”